Being in a different place

October 6, 2012 – 9:30 am

By Lorenzo

Australia has a long record of suffering more adversely than other economies from economic shocks. We had a bad 1890s Depression, a very bad 1930s Depression (though our recovery was notably quicker than the US’s), a 1970s suffering particularly entrenched stagflation.

Then came two decades of economic reform. The first major external economic shock the Australian economy shrugged off was the 1997 Asian crisis. Many of our major Asian export markets suffered a simultaneous major downturn. The $A took the shock, the exchange rate nosedived, and we simply used the cheaper $A to sell more to other markets. The Australian economy barely noticed.

But where the Australian economy has really managed a stellar performance has been during the Global Financial Crisis (GFC) and Great Recession. Apart from some nervous moments, we barely noticed the former and have not participated in the latter.

To the extent that Australia’s financial sector is now worth more than the Eurozone’s.

(Real GDP is GDP in goods and services terms.) (via) Bags be us and not them.

‘Incredible’ is correct. To think that Australia’s Gross Domestic Product far outstrips the US, or China, or Europe is not only incredible but also ridiculous. But if you are talking about ‘per capita’ then it makes some sort of sense. But even that begs the question of this graphic presentation – which seems to indicate that back in the dark ages (around 1996) they were all equivalent?

Again what this graph is probably saying is that in real terms, and relative to a base point, our per capita GDP growth has done rather well.

And the other point to note is that ‘financial sector’ != ‘banks’ per se. A goodly part of it is insurance; probably dwarfing banks (or I hope so, ’cause that’s who they cover their contract risks with)

So what you’re saying is that Aus now produces roughly 120 Commodores for every 100 produced back in the day, while the US only produces 105-107 thousand Chevy Volts for every 100 thousand. So relatively speaking our extra 20 Commodores is better than their extra 5-7 thousand Volts.

Good. Got that. Geez I love statistics.

And if Mel ever says something remotely sensible, then statistically speaking, that would be a 100% improvement. Could you graph that? 😉

Australia dodged the GFC. But did that have anything to do with our dollar being free to fall in value? If Australia was using the euro as our unit of account but was still outside the general regulatory sclerosis that is the EU* would we have suffered? Or was our good fortune more a product of a resources boom, low government debt a sound banking system and a relative open economy.

* A comparable example would be the 14 nations using the CFA Frank in West and Central Africa. This currency is fixed to the euro and may as well be the euro in terms of monetary policy effects.

[email protected] The graph is indeed reasonably clear in itself, and illustrates your main point made in the third paragraph. It did take a bit of thought to realise that though, since it appears straight after another sentence which is in very different terms.

There is bullying and I’ve witnessed it myself but I’ve never heard of public service managers demanding a 10% commission from workers in exchange for unpaid wages. Public servants also tend to be very aware of their rights and have various protections so accordingly they usually find it easier to stand up to bullies.

I think you’ll find that workers with minimal market power eg. unskilled easily replaceable workers, are easy prey for bullies. The same goes for the young, hence the bastardisation of apprentices and military recruits.

Then there’s those (private sector) factories in China where the workers choose to leap to their deaths from the rooftops. And then there are the other factories in SE Asia where the workers are chained 24/7 to their workstations and are surrounded by their own bodily wastes. Eek!

If Australia had been using the euro or if our dollar was fixed to the euro like the CFA Franc is then for the early part of the GFC we would have experienced a tighter monetary policy. However for the 5 year period Oct 07 to now the overall effect would have been much looser monetary policy.

I’m not saying we should have been on the euro but I’m not convinced that it would have been particularly detrimental.

I don’t have the data to hand but it would be interesting to look at what happened to GDP growth rates and unemployment in all the nations using the euro (or fixed equivalents) outside of the EU. There is quite a list from Africa and the Pacific.

[email protected] Exchange rates do not tell you who is running the looser monetary policy in the way you are suggesting. The graph in the post (i.e. the level and expectations of economic activity) provides more basis for explanation than falling exchange rate = looser monetary policy.

Let me assure you, the ECB’s monetary policy has been much tighter than the RBA’s. See, for example, this graph, taken from this post.

Hence the lower levels and expectations of economic activity in the Eurozone and the appreciating $A.

If the RBA had wanted to keep the Aussie dollar at the same value with respect to the euro over the five year interval it would have had to run a looser policy. That is the only way they could have stopped the dollar appreciating.

The argument that being in the euro is the cause of problems in Europe doesn’t wash. To be sure the lack of monetary autonomy does limit the responses available but then the presence of democracy and other such institutions does also.

Nations on the euro via proxy like New Calidonia and Cameroon seem to have done just fine. I don’t have at hand enough data to properly prove the point but I think the principle of looking at euro bound nations outside Europe is the right approach. And there are a lot of them.

If the RBA had wanted to keep the Aussie dollar at the same value with respect to the euro over the five year interval it would have had to run a looser policy. That is the only way they could have stopped the dollar appreciating.

Not true. Exchange rates are a price and prices are determined by both supply and demand. The RBA could have driven the $A down by running a very tight monetary policy, causing a nominal spending crash. It worked for the ECB. (This is an application of Scott Sumner’s principle “never reason from a price change”.)

The argument that being in the euro is the cause of problems in Europe doesn’t wash.

The argument is that a nominal spending crash is the key problem. The ECB ran a policy that suited Germany but not Southern Europe, who had a nominal spending crash with the disastrous debt consequences such things have.

Yes, running a monetary policy that suits both Northern and Southern Europe is profoundly problematic because of their very different political economies. But this particular crisis is a nominal spending crash + consequences crisis made by the ECB. (The failure of the Fed to increase the supply of US$ when demand for the main global reserve currency shot up helped transmit the crisis.)

Regarding the euro via proxy countries, the question then becomes whether they also had nominal spending/income crashes. Since the euro has been falling in value, making their exports cheaper, likely not though there may have been some adverse debt effects.

Hi Mel, yes I have and I was completely and totally, utterly wrong. Not only that but the extent of my wrongitude was clearly pointed out to me when I noticed the ‘via’ link that Lorenzo kindly included, which is an interesting read.